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BT - A new dividend policy, and a restructure in Global Services

George Salmon | 11 May 2017 | A A A
BT - A new dividend policy, and a restructure in Global Services

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BT Group plc Ordinary 5p

Sell: 99.24 | Buy: 99.32 | Change -1.56 (-1.55%)
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Full year results are in line with expectations, and the dividend is increased by 10% this year, in line with plans. However, BT has scrapped the target of increasing the payout by at least 10% next year, instead adopting a 'progressive' policy. The shares fell 1.8% on the news.

Our View

There is something of a split developing at BT, with the consumer division racing ahead while the divisions serving businesses and the public sector splutter.

The good news is the group has done a neat job in its consumer facing businesses, transforming itself from a broadband and fixed line business into a provider of a wide variety of consumer services. Through the acquisition of EE, BT now has a mobile offering of substance, and after investing in Premier League and Champions League football rights, the TV package is impressive too.

A common problem with telecoms is there isn't much to tie the customer in other than a low price. Bundling mobile, TV, internet and fixed line services together gives BT the chance to build a more loyal customer base. Customer growth has been impressive so far, and with the average contracted customer worth well over £450 per year there is the potential for some lucrative results.

However, much of the good work in the consumer division is being undone in real time. A dramatic profit warning in January revealed the scale of the improper accounting in Italy and detailed a material slowdown in the Business and Public Sector division.

Misdemeanours at Openreach (essentially BT unfairly delaying Ethernet installations) mean £340m is to be paid in fines and compensation, and another £300m is needed to cover the cost of restructuring a number of divisions including Global Services. Hopefully the changes can make the division simpler, and BT ends up with a more flexible, digitally focused operation.

Nonetheless, given these costs and BT's substantial debt and pension obligations, it's perhaps unsurprising that the group has put the brakes on the dividend. Rather than increase the payout by 10% next year as previously planned, BT has adopted a rather less definitive 'progressive' approach.

At present, the shares offer a prospective yield of 5.4%.

Full year results (adjusting for the acquisition of EE)

Fourth quarter underlying revenue was 0.9% down on a year before, with full year revenue of £24bn down 0.2%. This is in line with the group's most recent outlook.

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) was £7.6bn, broadly in line with prior expectations. Underlying EBITDA fell 4.6% in the fourth quarter, and 2.9% over the full year.

EE was the only division to report higher earnings, up 6% in the year. 192,000 contracted customers were added in the quarter, taking the year-end total to 30m mobile customers. Earnings dipped 4% in the Consumer division in 2016/17, as BT invested in new UK and Ireland customer service roles. In Q4, the group added 11,000 new TV customers and 29,000 retail fibre broadband customers (35% of total UK new connections), taking its retail broadband customer base to 9.3m.

EBITDA from Global Services dropped 11% over the year, driven by a £245m impairment against the Italian business. The group has announced a strategic review of the division and plans to make £300m of savings over two years. The cost is set to be around £300m, with 4,000 jobs set to be cut. In Business and Public services, underlying EBITDA was down 10%, reflecting the revenue decline in public sector. Profits from Openreach fell 1%, with Wholesale and Ventures down 6%.

Net debt was £8,932m at 31 March 2017, £906m lower than at 31 March 2016. The pension deficit was £7.6bn net of tax, up £2.4bn over the year. Guidance for 2017/18 is for EBITDA of £7.5bn - £7.6bn.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.